Archives for August 2015

After a tumultuous week with many ups and downs, markets regained ground to close in the black. For the week, the S&P 500 gained 0.91%, the Dow grew 1.11%, and the NASDAQ added 2.60%.

It’s hard to watch your portfolio value fluctuate, especially when the money involved represents a lifetime of hard work and a comfortable future. If you’re at or nearing retirement, you might be feeling especially emotional about market movements.

Right now, U.S. markets are experiencing a period of significant volatility with rapid selloffs followed by powerful rallies. High stock valuations and concerns about global economic growth are contributing to the swings in investor sentiment.

However, we can’t have the possible gains without the losses. It’s the nature of markets to move up and down, sometimes very rapidly. Trying to time markets is extremely difficult, and you’re unlikely to get the result you want by jumping in and out of markets.

So, what can you do when markets swing?

Use your head, not your gut. It’s natural to feel emotional about your hard-earned money. However, making emotional investing decisions can be very costly because you’re likely to buy and sell at the wrong time, potentially locking in your losses and losing out on gains.

Take a step back. We know that it’s hard to tune out the noise when media headlines scream that the sky is falling. Even when you know intellectually that pullbacks are normal, it’s natural to worry about whether this time is different. However, we recommend that you focus on the big questions:

Have your goals changed?

Has your investment timeframe changed?

Are your investments still in line with your goals?

Talk to us. If you’re worried about how recent market movements may affect your personal situation, we want to hear from you. Before making any decisions, give us a call to discuss your personal situation.

HEADLINES:Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Q2 GDP growth surprises. The second estimate of second-quarter Real Gross Domestic Product growth surprised by coming in at 3.7%. The first estimate showed 2.3% growth after 0.6% growth in the first quarter.

Stock markets around the world have been in tumult for days. Last week, stock markets around the world plummeted on fresh fears about how a slowing Chinese economy might affect the global economic outlook. Stocks remained volatile on Monday and Tuesday, falling further before regaining ground, and then reversing to end Tuesday in the red again.

What’s behind recent market movements? A few things:

Stocks have been trading near historic highs for months. A pullback was all but guaranteed and is a very normal part of market cycles. What gave investors a fright was the speed at which the pullback occurred.

Emotion is in the driver’s seat. The opposing emotions of fear and greed are putting stocks all over the map. Savvy investors are watching and waiting for opportunities to snap up bargains.

Fears about China are probably overrated. Slumping exports, currency devaluations, and shrinking smartphone sales have triggered dire warnings about the state of the Chinese economy. Let’s put China in perspective: Exports to China are worth 0.7% of U.S. GDP. Even if China slips into a recession, it may not be the end of the world. Some U.S. companies that sell a lot of goods in China may feel the pinch, but most of U.S. growth is driven by what we consume at home.

How long will the correction last? No one knows for sure, but it’s probably not a repeat of 2008 again. The financial crisis was driven by fundamental factors like a housing market crash and the ensuing mortgage meltdown. We can say that fundamentals for U.S. stocks remain positive. Here’s what we’re looking at:

The selloff may delay a Federal Reserve interest rate hike. Investors are uncertain about when and how the Federal Reserve will raise interest rates. People worried that the end of quantitative easing would spell disaster for stocks, but the S&P 500 still gained 9.5% between the start of tapering and the end of tapering. While the Wall Street consensus was for a September rate hike, recent market events may give the Fed more pause for thought.

Keep Calm and Carry On

Now, all of this is to say: keep cool, keep calm, and focus on your own goals. While it’s stressful to see portfolio values swing so wildly, the data behind the recent volatility doesn’t indicate any fundamental reasons to worry. Go outside, take a walk, play some golf. We’re keeping a very close eye on what’s happening in markets and will be in touch as conditions warrant.

U.S. stocks ended a defensive week in the red as investor sentiment deteriorated in the face of fresh worries out of China. For the week, the S&P 500 fell 5.77%, the Dow lost 5.82%, and the NASDAQ slid 6.78%.

When markets take a dive, it’s natural to worry about what’s happening and where markets will go next. However, part of being a stock investor is taking market swings in stride. Now is the time to stay cool-headed and focused on your long-term goals. On that note, here are 4 things that you definitely should not do after last week’s market pullback:

Don’t listen to the talking heads. The selloff is happening in the middle of a seven-year bull market. As of Friday, the S&P 500 has gone 1,418 calendar days without a 10%+ drop (between 10/3/11 and 8/21/15).[i]

Regardless of what the media is saying, the S&P 500 is down just 7.51% since its peak in mid-May. Markets experienced a similar selloff in September and October of last year. However, the talking heads have taken this widely anticipated pullback and made it sound like 2008 all over again. Remember – the media’s goals are not aligned with yours. They want to keep viewers glued to their televisions and newspapers, waiting for the sky to fall. Out in the real world, we’re taking a look at the numbers behind the selloff and making prudent adjustments where we feel it’s necessary.

Don’t panic and hit the eject button. Corrections are a normal part of market cycles. Since 1927, the S&P 500 has experienced pullbacks of 5% or more about every 3.5 months. While the past can’t predict the future, research shows that panicking and exiting the market is often the worst thing you can do when markets swing. Investors are notoriously terrible at picking market tops and bottoms; since periods of high growth often occur during turbulent times, investors who sell off and sit on the sidelines frequently miss out on the good days.

Don’t think like a day trader instead of an investor. Stock markets are driven by fear and greed. Right now, traders are in full-on fear mode and are selling off indiscriminately at any hint of bad news. Long-term investors are taking a look around and seeing what opportunities the pullback is offering.

Don’t get complacent. Pullbacks offer you the chance to ask yourself if you’re honestly prepared for a correction. If you can sleep well at night knowing that you have a prudent strategy and a well-diversified portfolio, then you’re better prepared for a potential correction. We don’t know whether the current selloff is a short-term blip that will reverse in a few days or the beginning of a deeper slide. However, domestic indicators are trending positively, and we believe that there is room for a resurgence.

We are keeping a very close eye on markets worldwide and will update you as needed during the evolving situation. While we can’t predict where markets will go in the next days and weeks, we specialize in helping clients protect and grow their wealth in many market environments.

ECONOMIC CALENDAR:

Tuesday: S&P Case-Shiller HPI, New Home Sales, Consumer Confidence

Wednesday: Durable Goods Orders, EIA Petroleum Status Report

Thursday: GDP, Jobless Claims, Pending Home Sales Index

Friday: Personal Income and Outlays, Consumer Sentiment

HEADLINES:

Weekly jobless claims rise more than expected. The number of Americans filing new claims for unemployment benefits rose more than projected last week, though the underlying trend is consistent with continued labor market improvement and the previous week’s claims were revised downward.

Housing starts boom. Groundbreaking on new homes rose in July to the highest level in nearly eight years. Builders ramped up activity on single-family homes, indicating that they expected significant demand later this year.

Inflation rises steadily. A measure of inflation, the general increase in the cost of goods and services, rose slightly in July, supporting expectations of an interest rate hike this year.

Greece finally clinched a third bailout from creditors when its parliament approved the deal and Germany backed off its opposition to the terms. The deal isn’t perfect and the International Monetary Fund is refusing to participate until there is an agreement on debt relief from Greece’s Eurozone creditors. However, U.S. investors greeted the news that Greece will remain in the monetary union with a sigh of relief. Is the Greek drama finally over? Probably not for long.

China added significant uncertainty last week when the Chinese government unexpectedly devalued the yuan against the dollar by the largest amount in two decades. While China claims that the move isn’t designed to lower export prices and boost demand, the move came after a series of depressing export reports that suggest China’s economy is in trouble. At any rate, China has been under immense pressure to devalue its currency as part of market reforms. Investors are worried that a currency war could put pressure on the dollar and hurt U.S. manufacturers.

Despite panicky media headlines that claimed that the sky is falling, the devaluation really isn’t a big deal. Here’s why:

A cheaper yuan is like a sale on Chinese goods. Right now, the Chinese economy is showing weakness, and a cheaper currency will hopefully help stoke growth in the world’s second-largest economy. If the move is successful in boosting growth, it will be a big help to the global economy. A more expensive dollar relative to the yuan means that Chinese consumers might end up importing fewer U.S. goods (potentially causing some U.S. firms to suffer in the short term). However, if it’s a sign that China may be allowing the market (instead of its central bank) to set the value of its currency, it’s a net win for global consumers in the long term.

Looking at the week ahead, all eyes will be on China to see whether last week’s currency devaluation will continue. Analysts will also be digging through the official minutes from the latest Federal Reserve Open Market Committee meeting for more hints about how the Fed plans to handle potential threats to economic growth.

P.S. You may have seen Chinese currency called the yuan or the renminbi in media reports and wondered if there was a difference. They are essentially interchangeable terms. Renminbi (meaning “people’s currency” in Mandarin) is the formal term used by Chinese officials, while the yuan is the actual unit of the currency.

Consumer sentiment flags in August. Though American consumers don’t seem to be concerned about inflation or current economic conditions, the latest survey indicates some concerns about their future finances. Dips in consumer sentiment could translate into lower spending this quarter.

Nationwide home rental prices are sky high. The cost of renting a home has risen to record highs. A study found that renters can now expect to pay about 30% of their income in rent, as compared to the 15% buyers pay toward a mortgage. Hopefully, unaffordable rents will contribute to housing market activity.

Weekly jobless claims rise again. The number of Americans filing new claims for unemployment benefits rose unexpectedly last week. Though claims have risen for three straight weeks, they are still below the 300,000 mark and still support a strengthening job market.

Business inventories rise. U.S. businesses increased their stockpiles of goods by the most in two years, indicating that they expect demand to increase in the coming months. Analysts hope that a stronger job market will boost consumer spending.